Analysis: Greek economy pays high price for its high prices

ATHENS (Reuters) - Signs across Athens advertise property for rent or sale. One in three shops has closed. At those still open for business, turnover has slumped.

So it is one of the mysteries of Greece’s economic depression that prices of some things - milk and the new iPhone, for example - are among the highest in Europe.

The riddle matters hugely. If costs and prices were lower, exporters would be more competitive and people’s shrinking pay packets and pensions would stretch farther, cushioning a sharp drop in consumption.

Increases in value added tax and other indirect levies are part of the answer. Greece is also hostage to the cost of imported oil and food.

But another set of reasons goes to the heart of Greece’s political and economic malaise: collusion among producers, the state’s complicity in shielding protected professions and businesses, and a thorough lack of competition that allows a favored few to extract economically unjustified profits from a long-suffering populace.

Much of the economy, in a word, is diseased. And until the disease is cured, sustainable growth cannot resume even if euro zone finance ministers finally agree - after two failed meetings in successive weeks - how to lighten Greece’s unsustainable debt burden.

The good news is that Athens is implementing some deep-seated administrative reforms and its trade deficit is receding.

But the clock is ticking: the burden of austerity and reform has fallen disproportionately on the man in the street, and his patience is all but exhausted. Protests over inequality and austerity are proliferating, fomenting political radicalism.

“Greece is on the edge right now. That’s why 2013 will be a crunch year for the economy and society,” said Dimitris Asimakopoulos, who owns one of the oldest pastry shops in Athens.

Asimakopoulos, who also heads the GSEVEE small business confederation, said his turnover had fallen 35 percent since the crisis struck. Profits were one-fifth of what they were then.

“The economy here is not an advanced capitalist economy,” he said. “But you can’t change an economy by pressing a button. You need time, and right now we don’t have time.”

LOW WAGES, HIGH PRICES

One button that a country living beyond its means has to press is marked ‘cost cutting’. Greece has done that. Wages are plunging at the behest of international creditors who are keeping the country alive on a drip-feed of aid.

By the end of this year, the entire surge in the average cost of labor per unit of output from 2001 to 2009 will have been unwound, according to a draft European Commission paper.

The drop in nominal unit labor costs this year alone is projected to be 8.7 percent - not surprising given that the unemployment rate is 25 percent.

But wages are only one input among many that determine prices. The most comprehensive gauge of a country’s cost competitiveness is its real, or inflation-adjusted, effective exchange rate (REER) relative to its main trading partners.

And in 2011, Greece’s REER was still 18-20 percent above its 2000 level, according to Eurostat, the EU statistics agency.

Inflation is falling - it was 0.9 percent in the year to September - and economists expect it to come down further.

But to thoroughly convert wage to price competitiveness will entail a daunting array of reforms, such as making it easier to start a business and removing barriers to competition in key markets such as energy.

Platon Monokroussos, head of financial markets research at Eurobank in Athens, said these market rigidities were one reason why falling wages had not translated into a quicker drop in inflation.

FAT PROFITS

Another reason, Monokroussos said, is rent-seeking - making excessive profits.

Eurostat figures show average food prices in Greece are higher than in the rest of the EU except for meat, fruit and vegetables. Milk, cheese and eggs are 31 percent more expensive than the EU average; cereals and oils cost 16 percent more.

The Organization for Economic Cooperation and Development says profit margins exceed the EU average in many key sectors, especially retailing, due to a lack of competition.

“This is a structure as old as the Greek state,” said George Zombanakis, an economist with the Bank of Greece, the central bank. He stressed that he was speaking in a personal capacity.

“This is something that can only be tackled by structural reforms, and everybody tries to do anything and everything except structural reform because then it becomes a political matter,” said Zombanakis.

Firms across the EU are frequently fined for price-fixing. But in the case of Greece, ending what the Commission calls “price rigidity and collusion in prices” means breaking a particularly strong nexus between politics and business.

“They’ve cut wages but haven’t touched monopolies,” said Costas Lapavitsas, an economics professor at the School of Oriental and African Studies in London.

“And the reason they haven’t intervened is because of the strength of the incumbents. The strength of big business is paramount, and it will take profound political change to alter this,” he said.

FISHING FOR CARTELS

Dimitris Kiritsakis, the head of Greece’s Competition Commission, acknowledged the lack of competition and said his watchdog, with just 120 professional staff, was probing 30 sectors to see if cartels operated.

“You can’t just make cartels disappear,” Kiritsakis told Reuters. “People think I can say ‘Come out, cartel, so I can catch you’. But you need to be lucky. It’s like fishing: you need to be in luck for the shoal to swim past in front of you.”

Other nefarious practices keep prices high.

Since March, doctors have been required to prescribe, and pharmacies to dispense, generic drugs instead of expensive brand names. But, as is often the case in Greece, the regulation has not been fully implemented.

This is costing patients money and leaving room “for wrong incentives to doctors, overprescription and outright fraudulent prescription behavior”, according to the European Commission.

What’s more, as part of their strategy to minimize taxation, multinational companies export goods to their Greek subsidiaries at inflated prices, said Vassilis Korkidis, president of the National Confederation of Hellenic Commerce.

Skordas, the deputy development minister, said he had filed an official complaint with the local representative of Apple Inc (AAPL.O), charging that the company’s new iPhone 5 sells for more in Greece than anywhere else in the EU.

THE DRACHMA NIGHTMARE

Addressing all the reasons for Greece’s high price levels and lack of competitiveness will take a decade or more, the International Monetary Fund reckons.

But Greece does not have that time. Korkidis said one in five of the 300,000 small trading firms that he represents might not make it through the winter.

Companies are starved of credit, but, just as importantly, they and their customers are unnerved by the specter that Greece might yet be forced out of the euro.

Why invest and spend hard euros if they might suddenly be converted into devalued drachmas?

“If this drachma nightmare goes away, the situation will probably be much better,” Korkidis said.

Asimakopoulos, the cake shop owner, agreed. Every quarterly inspection by Greece’s international lenders is the harbinger of more austerity and fresh doubts whether the country will stay in the euro, he said. Uncertainty is asphyxiating the economy.

“The most crucial thing is that there is no hope,” he said. “If we had light at the end of the tunnel, we could invest in our businesses.”

Which is why, though reforms to tame prices are imperative, it is more urgent to agree on a plan to put Greece’s massive debt on a stable long-term footing and banish the threat of ‘Grexit’, or exit from the euro.

“Greece is making big adjustments, but without a credible solution to the issue of debt sustainability, all that effort is going to be undermined. We need to end the uncertainty,” said George Pagoulatos, a professor of European politics and economy at Athens University.